The Great Interest Rate Heist
When the Federal Reserve raises interest rates, banks charge more for loans — but often don’t pay higher rates to depositors. This scheme has allowed banks to pocket a more than $1 trillion windfall over the past two and a half years.
A bronze statue of a bull fighting with a bear is displayed at the Museum of American Finance on October 7, 2008, in New York City. (Spencer Platt / Getty Images)
You know the subplots from Superman III and Office Space — where scammers skim bits of cash from lots of people, which adds up to tons of money? That’s the kind of heist the Federal Reserve is helping banks pull off, according to new data about net interest income — which is the difference between what banks charge you for loans and what they pay you on your deposits.
Last year, seven large banks reaped more than a quarter trillion dollars by using higher Federal Reserve rates to jack up interest rates on mortgages, auto loans, and credit cards — all while those same banks paid low interest to depositors, according to new letters from Sens. Elizabeth Warren (D-MA) and Jack Reed (D-RI). One of many examples the lawmakers document: the Fed pays JPMorgan Chase 4.4 percent interest on its deposits, but “customers continue to earn a negligible .01 [percent] on their savings” at JPMorgan Chase.
In all, banks have used this scheme to reap more than $1 trillion in new revenue over a two-and-a-half-year period, according to the Financial Times — and new federal data show net interest income is rising.
Banks can deposit your savings at the Fed and get paid 4.4 percent interest, while paying you almost nothing — but unlike banks, you can’t deposit your money at the Fed to get that same rate. The difference between Fed rates offered to banks and bank rates offered to you recently hit “a modern high.” While some countries have taken action against this scam, and proposals for a new US public banking system could combat this problem, Wall Street lobbyists have blocked those initiatives.
The process of switching banks to get better rates is often an annoying rigmarole (by design). When the Consumer Financial Protection Bureau last year finalized a rule to simplify switching banks, JPMorgan Chase’s Jamie Dimon vowed a “knife fight” against regulators and deployed his lobbying group to file a lawsuit against the rule.
Donald Trump’s administration stalled that rule, tried to dismantle the CFPB, and dropped the agency’s lawsuit alleging that Capital One cheated depositors out of $2 billion in interest payments. Trump’s regulators also repealed guidelines aiming to slow bank mergers (like Capital One’s), which tend to reduce competition to offer better interest rates. One recent study found “a 35 percent reduction in deposit interest rates” in counties that experienced such mergers.